The Input-Output framework can be employed to analyze the interdependencies of various sectors within the domestic economy, as measured by economic linkages. For example, one might be interested in examining the economic linkages of the tourism sector vis-à-vis agriculture, industry, and other services sector. The scattered chart compares the normalized forward and normalized backward linkages of various sectors, with point size reflecting their respective value-added contribution.
On one hand, tourism sector may purchase its production inputs from a more upstream industry, say agriculture. This interconnection between the tourism sector (as a purchaser) and agriculture sector (as a supplier of tourism sector’s production inputs) is indicated by backward linkage. On the other hand, the output of the tourism sector may also be used as production inputs of a more downstream industry, say other services. The relationship between the tourism sector (as a supplier of inputs) and other services (as a purchaser) is in indicated by forward linkage. A comparison of the strengths of backward and forward linkages allows the identification of key sectors that are most interconnected with the other sectors, and this could be used as a guide in policy decisions.
Backward and forward linkages can also be used to characterize the sectors into four typologies, which describe how connected they are with the rest of the economy. These typologies characterize the various sectors in the economy as (1) generally dependent, (2) dependent on interindustry demand, (3) generally independent, or (4) dependent on interindustry supply. Analysis of economic linkages is relevant in determining the potential impact of certain policies to the overall economy, and is therefore an important tool in crafting informed policy decisions.
Source: R. Miller and P. Blair. 2009. Input–Output Analysis: Foundations and Extensions. Cambridge: Cambridge University Press.